Pessimism Among Individual Investors Surges

Pessimism among individual investors jumped to its highest level in nearly a year in the latest AAII Sentiment Survey. The spike in expectations for a short-term drop comes as neutral sentiment fell to levels not seen since January.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined by 0.2 percentage points to 30.9%. During the past three weeks, optimism has fluctuated within a 1.5 percentage-point range. This week’s reading keeps bullish sentiment below its historical average of 39.0% for the eighth consecutive week and the 19th time in the past 21 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell by 6.9 percentage points to 30.9%. Neutral sentiment was last lower on January 2, 2014 (27.6%). Even with the drop, neutral sentiment remains above its historical average of 30.5% for the 31st consecutive week. This is the third-longest streak of consecutive weekly readings above 30.5% in the survey’s history.

Bearish sentiment, expectations that stock prices will fall over the next six months, spiked by 7.1 percentage points to 38.2%. This is the largest amount of pessimism recorded in our survey since August 22, 2013. It is also the first time since April of this year with a bearish sentiment reading above the historical average of 30.5% for two consecutive weeks.

Bearish sentiment is near, but not at, the upper end of its typical historical range. The spike in pessimism follows the S&P 500’s worst week in nearly two years and suggests some investors believe the market’s upward momentum is being interrupted. Also playing a role in the backdrop are concerns about prevailing valuations, heightened geopolitical tensions, slow economic growth and frustration with Washington politics.

Notably, bullish sentiment is still within its typical historical range. Keeping some AAII members hopeful about the short-term direction of the market is economic growth, the market’s overall upward trend, and the Federal Reserve’s tapering of bond purchases.

This week’s AAII Sentiment Survey results:

Bullish: 30.9%, down 0.2 percentage points

Neutral: 30.9%, down 6.9 percentage points

Bearish: 38.2%, up 7.1 percentage points

Historical averages:

Bullish: 39.0%

Neutral: 30.5%

Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.